Posted Oct 14, 2013 by Martin Armstrong

The European Banking Crisis is getting much worse and the whole structure is crumbling to dust. The banks cannot save themselves. The entire crisis is all about the structural design of the Euro, which the politicians will not address. They failed to create a single national debt and in so doing, the banks then used the debts of all member states as reserves. Southern European banks still depend on the steady flow of subsidies coming from the ECB. The politicians and academics are simply lost because they are avoiding anything that would expose the fatal flaw in the Euro design. Therefore, all we get is more of the same and with each band-aid applied failing to stop the blood gushing from the fatal wound. We need stitches at this point and there is nothing in sight that the politicians will even consider that requires them to take any responsibility whatsoever.

These European Zombie Banks, as they are being called, are creating a controversy surrounding a “safety net” that the ECB and European Commission are trying to create. Europe is desperately trying to take the DEFLATIONARY path by simply confiscating assets of all citizens in all Eurozone banks. So much for the hyperinflationists. They just do not get it. The banks are heavily indebted and cannot save themselves especially when they had to buy weakening government debt of member states and derivatives that blew them up offered by New York. The combination of toxic derivative products coming from New York and the fatal design of the Euro, it becomes impossible for many of the Eurozone Banks to survive intact.

The Eurozone is becoming an economic combat zone as this banking crisis merges with the Sovereign Debt Crisis and simply expands exponentially. Mario Draghi has injected about one trillion euros by “Longer-term Refinancing Operation” (LTRO 1 and 2) to support the banks. This, like the Fed, failed to produce inflation the gold promoters swore would happen because they failed to consider the contraction in assets we now face.

This entire bailout idea of maintaining extremely low-interest rates where banks in turn would provide loans to companies jump-starting the economy has utterly failed. The banks in the US refused to lend to small business without 120% collateral and in Europe, these liquidity injections were used to buy more government bonds that have then declined as rates in Europe have risen thanks to the structural defect of the Euro. Then stir in this toxic pot insane taxation that drastically reduces economic growth and you have a future that looks more like a wasteland.

Mario Draghi has simply declared that the Eurozone Zombie Banks need more liquidity but this will do nothing when the reserves are the bonds of member states that are themselves in perpetual escalating debt cycles. The banks will need more and more financial support until the reserve structure of the Eurozone is entirely reformed with the creation of a single debt that may now require the federalization of Europe. The banks cannot pay back the loans already made by the LTRO cash injections to the ECB so this entire design of this solution is just hopeless.

The Spanish banks absorbed €300 billion euros from the ECB with no hope of repayment. The Italian banks took in €255 billion euros also with no hope of repaying anything. The French banks owe €87 billion to the ECB, and the German banks owe €10 billion to the ECB. Then the Irish banks and Portugese banks owe about €80 billion.

Now that Merkel won the election, she will hand-over control of the banks to Brussels. What is on the table now is this idea of creating a common European bank bailout fund.The ESM (European Stability Mechanism) is a permanent crisis resolution mechanism for the countries of the euro area issuing debt instruments in order to finance loans and other forms of financial assistance to euro area Members States. However, the ESM is becoming a “lifeline” for banks in the Eurozone transforming the Union into a bank transfer union through the back door rather than an economic union.The ESM is thus emerging as a legacy for all European banks.

The Sovereign Debt Crisis in Europe is joined at the hip with the European Banking Crisis and this is caused by the failed Euro design structure. The Eurozone banks are burdened with vast amounts of bad loans running into the hundreds of billions of euros and the higher taxes move, the lower the economic growth that fuels the growth in bad loans. The Eurozone banks will need at least €700 billion in euros to meet stress tests.

The European public funds from the ESM are insufficient. The banking rescuers are frantically looking for a “safety net” and this is viewed as now creating a general bailout by seizing 10% of all deposits in Eurozone banks.

The European Commission wants to play games with the numbers. Any bank bailouts they want excluded the their budget deficit. However, these “Zombie Banks” are truly insolvent banks that can only exist by ECB monetary injections. In any case, such banks do not have recourse to the capital markets. Which banks are really “Zombie Banks”no one actually knows because the info is guarded denying the ability of depositors to identify risk assessment. It is not the private loans that mask the problem, but government bonds that are on the books of the banks in the euro periphery countries as well. The problem with government bonds has been simple – they are not backed by anything and are thus unsecured. Private bonds you can get at least something back in a bankruptcy whereas you get nothing in return for government bonds. The ECB does not wish to downgrade banks for holding Eurozone government bonds.

IMF head Christine Lagarde has been suggesting a wholesale seizure of 10% of all accounts throughout the Eurozone because there may be riots and discord if there are bail-ins on a case by case basis. The idea is that a wholesale seizure will prevent a bank-run for if bail-ins take place on a case-by-case basis then this might start a contagion. Consequently, the latest reports from the IMF discuss this super-seizure of 10% on all savings in the Eurozone they are calling a tax. This is argued to be necessary solve the debt problem in most sovereign countries. It would be an alternative of higher taxes or spending cuts. The economists who actually wrote the paper claim it appears to be an efficient solution for the debt problem yet it lacks long-term analysis.

Still, this would not deal with the structural and systemic problems of the Euro by itself and as such will not address the acute bankruptcy risk of the member states themselves. Governments borrow with no idea or design to ever pay anything back.

In the last section of the IMF report, on page 58, right before the appendices, it reads:

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair). There have been illustrious supporters, including Pigou, Ricardo, Schumpeter, and—until he changed his mind—Keynes. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away (these, in turn, are a particular form of wealth tax—on bondholders—that also falls on nonresidents)

There is a surprisingly large amount of experience to draw on, as such levies were widely adopted in Europe after World War I and in Germany and Japan after World War II. Reviewed in Eichengreen (1990), this experience suggests that more notable than any loss of credibility was a simple failure to achieve debt reduction, largely because the delay in introduction gave space for extensive avoidance and capital flight – in turn spurring inflation.

The tax rates needed to bring down public debt to precrisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth(*).

One should note that the first paragraph of the report right away debunks the myth that politicians and main stream media try to sell, i.e. the crisis is contained and the positive economic outlook for 2014.

High debt ratios amid persistently low growth in advanced economies and emerging fragilities in the developing world cast clouds on the global fiscal landscape. In advanced economies, with narrowing budget deficits (except, most notably, in Japan), the average public debt ratio is expected to stabilize in 2013-14. Yet it will be at a historic peak (about 110 percent of GDP, 35 percentage points above its 2007 level). Simulations show that maintaining the overall budget at a level consistent with the IMF staff’s medium-term advice would bring the average debt ratio to about 70 percent of GDP by 2030, although in a few countries it would remain above 80 percent. However, the large debt stock, the uncertain global environment, weak growth prospects, and the absence of well-specified medium-term adjustment plans in systemic economies like Japan and the United States complicate the task.

Consequently, what lies ahead is anything but plain vanilla. The Eurozone remains the source of the most extreme threat to the global economy.